Tax-loss harvesting – one of the most strategic investment techniques – enables investors to reduce their tax liabilities by using realized losses to offset capital gains.
As an investor, if you are unaware of how losing money can ultimately lead to significant savings on your tax return, look no further; you’re now at the right place!
In this detailed guide, we’ve broken down five ways tax loss harvesting will help you save money on taxes. So, continue to read on…
- Offsetting Capital Gains
Tax loss harvesting enables investors to offset capital gains with realized losses. Let’s understand this through an example. Suppose you have a capital gain of $20,000 from the sale of a stock but also realize a loss of $10,000 from another investment. In that case, you can effectively reduce your taxable capital gain to $10,000, lowering your tax bill.
- Carrying Losses Forward
If you realized losses that exceed your capital gains within a tax year, you can carry these losses forward to future years. This implies that if you incur a $15,000 loss and only have $5,000 in gains, you can take advantage of the $10,000 loss in subsequent years to offset future capital gains. Hence, you will get significant benefits in the long run.
- Diversifying Your Portfolio
Engaging in tax loss harvesting strategies periodically can help you maintain a diversified investment portfolio. When you reassess your portfolio and cut losses accordingly, you will significantly enhance your overall risk-adjusted returns.
By adopting this practice, you will remain focused on investments that best align with your financial goals. You won’t need to hold onto underperforming assets out of sheer inertia.
- Reducing Ordinary Income
Beyond providing capital gains, you can use up to $3,000 of net capital losses to offset ordinary income, such as wages or business income. As a result, this maxes out at $3,000 for individual filers or $1,500 for married individuals filing separately. Whatever your marital status is, you will witness a direct reduction in taxable income for the year in which the losses are realized.
- Reinvesting Wisely
How about selectively selling underperforming assets to harvest losses? You can reinvest the proceeds into more promising investments. This strategy will not only allow you to capture immediate tax benefits but also position your investment portfolio for better long-term performance.
Just be wary of the “wash sale” rule. It disallows the deduction if you repurchase the same or substantially identical security within 30 days.
In a Nutshell
Tax loss harvesting is a valuable tool for savvy investors, including you, looking to maximize their tax efficiency. Once you understand and implement these practices, you can transform your investment losses into substantial tax savings.
For more information regarding saving money on taxes through tax-loss harvesting, go visit Creative Planning’s official site. Staying informed and utilizing effective strategies to save money will pave the way for a more favorable financial future.
